Australian Machinery and Investment Co Ltd v Commissioner of Taxation

180 CLR 9

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(Judgment by: STARKE J)

Australian Machinery and Investment Co Ltd
v Deputy Commissioner of Taxation

Court:

Judges: Latham CJ

Starke JDixon J
McTiernan J
Williams J

Subject References:
Taxation and revenue
Exempt Income
Income sourced outside Australia
Appeal against assessment
Sale of shares in England
Appeal against assessment
Power to set aside

Legislative References:
Income Tax Assessment Act 1936 (Cth) - s 23(q); s 99

Hearing date: Sydney, 8 April 1946, 9 April 1946, 10 April 1946
Judgment date: 7 June 1946

Melbourne

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Judgment by:
STARKE J

These are cross-appeals from a judgment of my brother Rich in an appeal brought by the appellant company pursuant to the Income Tax Assessment Act 1936 (Cth) from its assessment to income tax. The assessment purports to have been based on income derived by the appellant during the year which ended on 31 October 1936, the accounting period of the appellant.

My brother Rich made certain declarations, set aside the assessment and remitted the matter to the Commissioner for re-assessment. The case was heard on admissions and some oral evidence. But only questions, which were described as principles, were argued and questions of quantum were reserved.

The appellant company was registered in Victoria and acquired many mining interests in Western Australia upon which it expended about PD119,251. It floated twenty-seven subsidiary companies which were registered in Western Australia and to each of these companies the appellant sold and transferred some of its interest, and received from the subsidiary companies in payment, twenty-seven parcels of fully paid shares of a total nominal value of more than three million pounds. Then, in England, the appellant company sold these shares to seven companies incorporated in England and received as a consideration PD481,945 in cash and shares of a nominal value of PD1,075,000 with options to take up other shares of a nominal value of PD1,267,500. Further the appellant sold a large number of shares in the English companies and a number of options to various persons interested in the promotion of the English companies and it also transferred shares in the English companies, other than those sold as aforesaid, to two subsidiary investment companies, Kookaburra Investments Ltd and Austmac Investments Ltd by way of exchange for shares in those companies.

The balance sheet at 31 October 1936 reflects these involved share transactions in this entry:

The income tax Commissioner took this figure of PD264,984 as the gross income of the appellant for the year ended 31 October 1936 and subject to some additions and deductions arrived at taxable income of PD191,700 for the financial year 1936-1937. The final accounts of the company state this appreciation of capital at PD15,444 which is brought about, I think, by the exchange reserve, but a reconciliation account annexed to the admissions, Ex. TT, brings out the same taxable balance.

An income tax is imposed upon the taxable income derived during the year of income by any person whether a resident or non-resident (Income Tax Act 1936 (Cth); Income Tax Assessment Act 1936 (Cth), s 17). A "resident" includes a company which is incorporated in Australia (Income Tax Assessment Act 1936, s 6) "`Taxable income' means the amount remaining after deducting from the assessable income all allowable deductions" (Income Tax Assessment Act 1936, s 6). And "Assessable income" means all the amounts which under the provisions of the Act are included in the assessable income (Income Tax Assessment Act 1936, s 6). The assessable income of a taxpayer includes where the taxpayer is a resident the gross income derived directly or indirectly from all sources whether in or out of Australia (Income Tax Assessment Act 1936, s 25).

It was pursuant to these provisions that the appellant was assessed. Both parties now agree that this assessment cannot be supported.

It was conceded that the sale by the appellant of its mining interests and shares was not merely a realization or conversion of capital assets but the carrying on or carrying out of a business or profit making scheme. Further it was conceded, at all events for the purposes of argument, that the shares received by the appellant in consideration of transfers or exchanges of mining interests or shares should be treated as realized profits assessable to income tax (cf Commissioner of Taxes (Q) v Burke (1926), 38 CLR 314 ; Perrott v Deputy Federal Commissioner of Taxation (NSW) (1925), 40 CLR 450 ; Federal Commissioner of Taxation v Thorogood (1927), 40 CLR 454 ). The appellant contends that its assessment was excessive and it also relies upon s 23(q) of the Income Tax Assessment Act 1936:

"The following income shall be exempt from income tax:

(q) income derived by a resident from sources out of Australia, where that income is not exempt from income tax in the country where it is derived ... "

The parties are agreed that some part of the appellant's income was derived from a source wholly Australian, some part from a source wholly English, and some part from sources partly Australian and partly English. But the appellant insists that the profit which it made on the sale of shares in English companies is income derived wholly from an English source, whilst the Commissioner contends that the source is partly Australian and partly English.

And it was conceded that any income derived from an English source was not exempt from English taxation. It was not stated whether this concession was based upon the decision of this Court in the Texas Case ((1940) 63 CLR 382 ) or upon the reasons given for its decision by the General Commissioner of Taxes for the City of London or upon some other ground. But as both parties agree that income of the appellant company derived from an English source is not exempt from English taxation this court is not called upon to investigate the matter for itself or to consider what is the precise meaning of the phrase "where that income is not exempt" in s 23(q). Indeed, I think, it is better to refrain from so doing until the facts are more certainly ascertained.

So the main question debated before this Court was whether the profit from the sale or transfer by the appellant of shares in English companies in England was income derived wholly from English sources or partly from an English source and partly from an Australian source.

The appellant, as already mentioned, sold and transferred a large proportion of the shares allotted to it by English companies and a number of options acquired from the English companies and it disposed of certain of the shares and options to various persons interested in the promotion of the English companies.

During its income years ended 31 October 1933, 1934, 1935 and 1936, the company's assets as a result of these transactions increased in value in Australian pounds according to its accounts by PD1,643,979 of which amount the sum of PD271,519 was set aside as a reserve for exchange of this amount of increase PD172,382 is the amount included in the final assessment as profit derived by the appellant in the income year ended 31 October 1936. Included in this sum of PD172,382 is a sum of PD150,168 which is a balance of an account as follows:

And the balance of PD172,382, namely PD22,213, is also a balance of an account as follows:

And there are some other transactions which must be mentioned.

During the accounting period the appellant bought and sold in England other shares in the seven English companies and the surplus sales over purchases amounted to PD15,220 but during the accounting period the value of the companies investments in other English companies fell by the sum of PD8,935, leaving a surplus of PD6,285.

And during the accounting period the appellant sold in England an option to purchase shares in a Victorian company known as Mephan Ferguson Pty Ltd and the selling price was PD2,500 in excess of the purchase price.

The question is from what source or sources these various profits arise or to use Lord Atkin's phrase in Smidth & Co v Greenwood (Surveyor of Taxes) ( [1921] 3 KB 583 , at p 593) "where do the operations take place from which the profits [or for the purpose of the Income Tax Act `the income'] in substance arise". One rule deducible from the decided cases is that where the essence of the business ordinarily consists in making certain classes of contracts and in carrying those contracts into operation with a view to profit or income then for the purposes of Income Tax Acts, such as here under consideration, the business is carried on within the locality where such contracts are habitually made which is the source of the profit or income (cf Lovell & Christmas Ltd v Commissioner of Taxes (Vict), [1908] AC 46 ; Commissioner of Taxes (Vict) v British Australian Wool Realization Association Ltd, [1931] AC 234 , at pp 254-255; Public Officer of Studebaker Corporation of Australasia Ltd v Commissioner of Taxation (NSW) (1921), 29 CLR 225 ; Commissioner of Taxation (WA) v D & W Murray Ltd (1929), 42 CLR 332 .)

Another rule is that where the essence of the business is a series of operations with a view to profit or income then the place where one operation is performed cannot be fastened on as the locality from which the whole of the profits or income are derived or as the source thereof. The profit or the income is the money resulting less expenses attendant on all the stages. The source or sources thereof are the places where those operations are conducted (Commissioners of Taxation (NSW) v Kirk, [1900] AC 588 ; Mount Morgan Gold Mining Co Ltd v Commissioner of Income Tax (Q) (1923), 33 CLR 76 ; Commissioner of Taxation (NSW) v Hillsdon Watt Ltd (1937), 57 CLR 36 .)

Turning to the particular amounts appearing in the accounts:

1. Anglo Australian Gold Development Ltd

Property Sale A/c PD62.10.0

Apparently this represents the value of the consideration received during the year on account of the sale of shares in Western Australian subsidiary companies less expenditure. Except that the subject matter of the sale was shares in Western Australian companies the transaction was entered into and wholly carried out in England. But it was said that the transaction was merely a step in the appellant's profit making scheme. Prima facie, in my opinion, the case is governed by the rule in Lovell's Case and the source of the profit or income appears to be exclusively English. But as the assessment must be remitted to the Commissioner in any case he should be free to review the whole circumstances of the case. The parties stated that no further evidence is available other than the facts appearing in the appeal book but I notice that Rich J was asked to grant a commission to take evidence in England which he refused at that stage because he was remitting the matter to the Commissioner.

2. Commonwealth Mining & Finance Ltd

Property Sale A/c PD196,875

This transaction is involved but the amount represents the market value of 350,000 shares received in settlement of rights under contracts of purchase. The Commonwealth Mining & Finance Ltd purchased shares in the Western Australian subsidiary companies from the appellant and transferred 350,000 shares in settlement of its obligations under its contracts of purchase. Again the subject matter of the sale was shares in Australian companies but the transaction was entered into and wholly carried out in England. Prima facie, in my opinion, this case is also governed by the rule in Lovell's Case and the source of profit or income was exclusively English. But as the assessment will be remitted to the Commissioner he should also be free to review the circumstances of the case.

3. Great Boulder Mining & Finance Ltd

Share Acquisition A/c PD9,516

This represents profit or income in account on the exchange of 124,498 shares for shares in Commonwealth Mining & Finance Ltd Both companies were incorporated in England and the exchange was therefore of shares in English companies. The transaction was entered into and wholly carried out in England. It has no connection with Australia and the profit or income is, in my judgment, exclusively English.

4. Balance of Account - PD22 213

Items forming this balance are disposed of by the fourth and fifth declarations of the judgment by Rich J which are not the subject of appeal. It is therefore unnecessary to consider further this balance.

5. Surplus - PD6 285

The facts already mentioned and the account itself fails to disclose any connection with an Australian source of this surplus. In my judgment, it is attributable exclusively to an English source.

6. PD2 500 - Sale of option to purchase shares in an Australian Company

The only connection of this transaction with Australia is that the option was over shares in an Australian company. The transaction was entered into and wholly carried out in England which, in my judgment, is the exclusive source of this profit or income.

The declarations made by Rich J remain for consideration.

The first declaration is not quite accurate according to the parties and they consent to the following declaration being substituted:

"That the appellant company derived its profit from its business and operations partly from sources exclusively in Australia, partly from sources exclusively in the United Kingdom, and as to the remainder from a source partly in Australia and partly in the United Kingdom, and that for the purposes of s 23(q) of the Income Tax Assessment Act 1936 the profit of the company which was derived from sources out of Australia is exempt from tax in Australia if not exempt from tax in the United Kingdom."

The declaration seems to state the facts correctly but it is not very enlightening nor, I think, particularly useful. But I suppose the parties can indicate on further proceedings the items under each head. As the facts warrant the declaration and the parties consent, this variation should be allowed.

Declaration 2

In my opinion, the latter part of this declaration should be omitted. The shares and options do not form trading stock within the meaning of ss 28 and 31 of the Income Tax Assessment Act 1936.

Declaration 3

In my opinion, this declaration is too wide as may be gathered from my opinion as to the various items of profit or income already mentioned. But it appears that in one transaction certain shares in an English company were sold in Australia in the year ended 31 October 1934. It related to a parcel of 65,000 Anglo Australian Gold Development Ltd option vendor shares received as part consideration for all the shares in Western Australian companies. The amount of profit derived by the company according to its books was PD19,358. After the word "realization" in this declaration the words "in Australia" should be inserted.

And it should be declared that any profit or income derived from the exchange of 124,498 shares in Great Boulder Mining & Finance Ltd, and from the surplus of PD6,285 and from the sum of PD2,500 all above-mentioned was derived from sources out of Australia within the meaning of s 23(q) of the Income Tax Assessment Act 1936.

But the other amounts above-mentioned should, I think, be re-considered by the Commissioner and no binding declaration should be made as to them.

The Commissioner sought another declaration as to the assessable income to be apportioned for the purposes of s 23(q) but as it is coupled with the third declaration made by Rich J, which cannot be supported, and is obscure in some respects, this declaration should be refused.

My brother Rich set aside the assessment of the appellant and remitted the matter to be dealt with under the Income Tax Assessment Act 1936 and for re-assessment of the appellant's taxable income. The Commissioner contended that there was no power to set aside an assessment but the words of s 199 of the Income Tax Assessment Act 1936 and the frequent orders of the Court made in pursuance of that section amply sustain the order made. But it was contended that as a matter of discretion the assessment should not have been set aside but only the decision of the Commissioner upon the appellant's objections and those objections remitted for re-determination and consequent amendment of the assessment. It is difficult, I think, to relate the judgment of Rich J or of this Court to the actual objections of the appellant and in any case it is clear enough that any amendment of the appellant's assessment will involve an assessment upon an entirely new basis.

It appears to me somewhat unfair and unjust that the appellant should have to pay heavy interest from a past date upon a sum ascertained for the first time by an assessment amended pursuant to the judgment of this Court.

My brother Rich exercised his discretion with all the facts before him and I see no sound reason for interfering with his order in this respect.

Subject to the amendments, variations and additions already mentioned this appeal and cross-appeal should be dismissed.